___ ___are pure plays on volatility with returns that are driven directly by exposure to the volatility factor.

**Volatility derivatives **are pure plays on volatility with returns that are driven directly by exposure to the volatility factor.

Investments that tend to decline with increases in return volatility are said to be ___ volatility and have a ___risk premium.

Investments that tend to decline with increases in return volatility are said to be **short **volatility and have a **positive **risk premium.

Studies show that volatility ___ a unique risk factor.

Studies show that volatility **is **a unique risk factor.

An options ___ is the length of time until the contract expires

An options **tenor **is the length of time until the contract expires

The time decay of options decreases at the ___ ___of ___.

The time decay of options decreases at the **square root **of **time**.

A ___ ___ combines a short call and a short put on the same asset with the same strike price.

A **short straddle **combines a short call and a short put on the same asset with the same strike price.

A ___ ___combines a short call and a short put on the same asset, with different strikes.

A **short** **strangle **combines a short call and a short put on the same asset, with different strikes.

At-the-money straddles have ___ market beta.

At-the-money straddles have **zero **market beta.

A short ___ ___ involves selling an out-of-the-money bull spread and an out-of-the money bear spread.

A short **iron condor **involves selling an out-of-the-money bull spread and an out-of-the money bear spread.

A short ___ ___ involves selling a bull spread and a bear spread with the same middle strike price.

A short **iron butterfly **involves selling a bull spread and a bear spread with the same middle strike price.

___ reflects the effects of declines in return volatility of the underlying asset and ___directly reflects the passage of time. These two measures are ___ correlated.

**Vega **reflects the effects of declines in return volatility of the underlying asset and **theta **directly reflects the passage of time. These two measures are **highly **correlated.

Options with higher vega have ___ gammas and ___thetas. An option with higher vega decays ___each day than one with lower.

Options with higher vega have **lower **gammas and **higher **thetas. An option with higher vega decays **more **each day than one with lower.

___ risk can be reduced by hedging a call position with a short position in the underlying asset.

**Delta **risk can be reduced by hedging a call position with a short position in the underlying asset.

___-neutral hedged option positions are a play on the volatility of the option's underlying asset.

**Delta**-neutral hedged option positions are a play on the volatility of the option's underlying asset.

Delta-neutral portfolios that are long options are ___ gamma.

Delta-neutral portfolios that are long options are **long **gamma.

To keep a long gamma portfolio hedged, traders ___ as the stock price falls and ___as it rises.

To keep a long gamma portfolio hedged, traders **buy **as the stock price falls and **sell **as it rises.

If realized volatility exceeds the initial vega, then positive effects of long ___ dominate the effects of ___and the position experiences a ___.

If realized volatility exceeds the initial vega, then positive effects of long **gamma **dominate the effects of **theta **and the position experiences a **gain**.

Infrequent rebalancing is a bet that volatility will be ___.

Infrequent rebalancing is a bet that volatility will be **directional**.

Realized volatility ___-___, ___and has a ___ ___.

Realized volatility **mean**-**reverts**, **clusters **and has a **long** **memory**.

Volatility is often modeled using ___ ___ ___ ___ and ___ ___ models.

Volatility is often modeled using **generalized autoregressive conditional heteroscedasticity **(GARCH) and **regime switching** models.

An ___ ___ ___ represents several vegas relative to their tenor, moneyness or type.

An **implied volatility structure **represents several vegas relative to their tenor, moneyness or type.

A vega structure that focuses on the relationship between vegas and moneyness is a ___ ___.

A vega structure that focuses on the relationship between vegas and moneyness is a **volatility skew**.

An option's ___ ___ is a graphical representation of vega for several options with different expiration dates and strike prices.

An option's **volatility surface **is a graphical representation of vega for several options with different expiration dates and strike prices.

Volatility strategies have recovered from drawdowns in less than ___ year, which contrasts with long-only stocks, credit, or commodity investments that can take ___-___ years.

Volatility strategies have recovered from drawdowns in less than **1** year, which contrasts with long-only stocks, credit, or commodity investments that can take **1-2** years.

Mean reversion in realized volatility (is/is not) aribtragable.

Mean reversion in realized volatility **is not** aribtragable.

A ___ ___is a process that is used to model values that may experience large discrete changes.

A **jump process **is a process that is used to model values that may experience large discrete changes.

___ ___is the risk of continuous accrual of small changes in an asset's volatility over time.

**Volatility diffusion **is the risk of continuous accrual of small changes in an asset's volatility over time.

A ___ ___refers to the risk of large, sudden increases in voalitility.

A **volatility jump **refers to the risk of large, sudden increases in voalitility.

Continuous time diffusion process for returns (equation)

A ___ ___occurs when the observed behavior of a financial series undergoes a significant change.

A **regime change **occurs when the observed behavior of a financial series undergoes a significant change.